Laddering


wealthymatters.comNormally,for fixed income instruments , the interest rates corresponding to longer terms are higher than those for shorter terms.However,locking in money for longer periods is not always an option.One way of ensuring a greater degree of liquidity while taking advantage of the higher rates offered for the longer tenures is laddering.

If you want to create a 5 year ladder you could buy a 1year, 2year, 3year,4year and 5year instrument .Then after the first year,renew the matured 1 year instrument for a term of 5 years.Then the following year do the same with the matured 2year instrument.Continue the process.

Laddering ensures that at least some of the higher interest rates are locked in and that the average rate is higher than the rates at the lowest point in the interest rate cycle.

If you are drawing an income from your fixed income instruments say to pay or part pay you a pension,your EMIs,a tution fee or get some passive income,laddering smoothes out the variations.

Laddering is possible with bonds,NCDs,FDs,CDs etc.

Company Deposits – Caveat Emptor


wealthymattersWhen inflation is high and interest rates on term deposits and bonds are low, or when fixed income instruments start offering equity like returns during liquidity crunches, company fixed deposits  become  tempting. Here are a couple of things to consider to rein in your greed.

1.No one became a billionaire via company deposits, unless he owned the company taking the deposits, so hold your horses.Company deposits can be tax inefficient, so think twice before sticking your in money here.

2.A company FD is an unsecured debt so if a company is liquidated, FD holders are paid after debenture holders and commercial lenders. By then there might not be enough to pay back the principal, much less interest. Liquidation proceedings take time so even whatever little money might be returned to you will take a while to come. So avoid companies with accumulated losses. Read more of this post

Running The Interest Rate Race


wealthymatters.comIn inflationary times fixed income instruments may not be such a great idea , especially if the interest rates are just not that high.But there is no way we can avoid these instruments.

1.We need them to add steadiness to our portfolios especially when the stock markets show volatility.

2.We need  them to  park the money we plan on using within a definite time horizon.

3.We need them again  when we have to route a steady stream of  payments into another investment and want to simultaneously avoid both the risk of a capital loss due to a short term investment in a mutual fund and the low returns of a liquid fund.

In such a situation we just need to find the highest possible interests which our funds can earn in a given time over and above the rate of inflation while simultaneously reducing the risk of capital loss. Read more of this post

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